Inside coworking company Knotel’s spectacular collapse
- Free spending and outsized ambitions brought about Knotel’s bankruptcy, insiders say.
- The flexible-workspace company’s mounting bills and vacant spaces posed problems pre-pandemic.
- More than a dozen people described how Knotel went from trying to rival WeWork to bankruptcy proceedings.
- Visit the Business section of Insider for more stories.
On Friday, the flexible-workspace company Knotel sent a bluntly worded letter to tenants in its 2 million square feet of New York City offices. Within just a few hours, the letters said, they would have to vacate.
“Knotel urges you to remove any and all of your property … prior to 3:00 PM local time,” read one letter from the firm to a tenant at a Knotel location at 110 Greene St. in Manhattan’s Soho neighborhood, which was shared with Insider. “Knotel assumes no responsibility for customer property remaining at these locations after January 29.”
The hectic and unusual order presaged Knotel’s filing for bankruptcy under chapter 11 in the US Bankruptcy Court for the District of Delaware over the weekend.
The coworking company, once valued at over $1 billion and seen as a WeWork rival with a global footprint of nearly 5 million square feet, said it would abandon much of its US space. The dissolution of so much of the firm’s portfolio jolted tenants — or members — in the normally slow-moving world of commercial real estate, where relocations are planned months or years ahead.
The bankruptcy filing, and the chaos it triggered, was an outcome that several former executives, landlords, and observers said they foresaw for the fast-rising company, whose grand ambitions had begun to falter well before the pandemic accelerated its decline.
Insider spoke with over a dozen people close to Knotel about the company’s rise and fall and the leadership of its eccentric cofounder and chief executive, Amol Sarva. They said the 43-year-old serial entrepreneur propelled the firm into the spotlight, but not without alienating rivals, employees, and business partners along the way.
“I’ll never do business with them again,” said Steven Durels, a senior executive at one of New York’s largest office owners, SL Green. He expressed a distaste for the firm’s conduct echoed by others Insider interviewed.
A spokesman for Knotel declined to make company executives available for comment, but disputed some of the facts and accounts in this story.
Sarva often pitched Knotel as a more stable version of industry giant WeWork, which came close to collapse in 2019 as it hemorrhaged cash and abandoned an IPO attempt. To highlight the differences between the firms, Sarva pointed to Knotel’s exclusive focus on larger leases with corporate customers, a more reliable and lucrative tenant base, he said.
Like WeWork, however, Knotel spent freely, ran unprofitably, and committed to millions of square feet of long-term office leases. The empty offices became a heavy financial burden as it struggled to fill the spaces with rent-paying customers, people close to the company and financial information reviewed by Insider suggested.
Knotel lost a total of $202.3 million in the first 10 months of 2020, according to financial information reviewed by Insider. In 2019, it lost $223 million, Insider previously reported.
Buoyed by Sarva’s charm and an ascendant flexible-workspace industry, the company was able to solicit hundreds of millions of dollars from a raft of big-name backers. Investors include Josh James, the CEO of cloud-software company Domo, former Thomson Reuters CEO Thomas Glocer, the venture capital firms Norwest Venture Partners and Peak State Ventures, and other financial players, including the Kuwaiti investment fund Wafra and the real estate services firm Newmark.
With the bankruptcy filing, the money these investors poured into the firm is likely to be wiped out.
“I have written my investment down to zero,” one Knotel investor told Insider. “[I’m] assuming I won’t get anything.”
Knotel’s rapid growth was fueled by an offbeat CEO
Founded in 2015 by Sarva and the Russian-born entrepreneur Edward Shenderovich, Knotel seized on the dramatic growth of coworking. Its explosion in popularity among tenants pushed WeWork to a valuation that at one point crested at nearly $50 billion.
Knotel was just a fraction of that size but saw itself as one of WeWork’s most prominent rivals, propelled by the vocal and media-savvy Sarva. Sarva arranged for school buses painted with Knotel’s logo to park in front of WeWork locations in Manhattan in a stunt to encourage its members to defect. He boldly proclaimed in an interview that Knotel would overtake WeWork in the same manner that Amazon had outgrown early competitors like eBay.
Behind the scenes, Sarva cast himself as an offbeat CEO with little regard for the customs and etiquette of the commercial-real-estate industry and the larger corporate world. In 2018, he wore an unbuttoned green military blazer to an annual black-tie gala attended by thousands of power players in New York real estate.
At Knotel’s corporate headquarters, in Manhattan, he’d pass out beaded necklaces to employees, telling staff “you need to fly your flag” and “find your inner peace,” a former company executive said.
Another employee said that over dinner in 2019, Sarva said he’d taken a hypnotism seminar and could place people under his spell. “I’m quite good at it,” the person said he remembered Sarva telling him.
Knotel’s moves rankled real-estate power players
There were early signs that Sarva’s brash mix of irreverence and self-confidence was causing friction with key counterparties, including landlords and clients, relationships that Knotel needed to expand.
Sarva began to grate on key cogs in the world of real-estate dealmaking as early as 2017, vexing brokers at major firms such as CBRE, which negotiate most of the city’s significant office-leasing deals.
Sarva said in an interview with Built in NYC, an online startup community, that Knotel’s business model would seek to “cut out the middleman.” He told staff that brokers and landlords “need us, we don’t need them,” two former insiders at the company said.
In 2019 Knotel rankled SL Green — one of New York’s largest office owners — during negotiations to sign a lease for a 100,000-square-foot space. The deal would have ranked among Knotel’s largest commitments at the time and could have served as a gateway to doing business with an important Manhattan landlord.
Instead, Knotel dragged out the talks for the space, both SL Green and the former Knotel employee said, as it sought to find members who would fill the location and ensure its profitability. When it failed to solicit enough interest from clients, it abruptly backed out of the negotiations.
“They strung me along and then walked away at the last second,” said Durels, the SL Green executive. “They lied straight to our face. It was such a bad experience.”
Knotel was shackled with subpar offices and costly vacancies
Snubbing major owners and brokerage companies cost Knotel, people close to the company said. In the solid office-leasing market before the pandemic, Knotel was increasingly forced to take lesser-quality spaces in second-tier New York City buildings.
“They were pushed into lower-level spaces in older buildings with smaller floors,” said Roy Hirshland, the CEO of the advisory company T3 Advisors, which has helped its clients arrange flexible workspaces, including at Knotel locations.
By mid-2019, nearly 30% of Knotel’s 2-million-square-foot New York portfolio faced immediate or pending vacancies. Knotel’s spokesman said that the company hadn’t yet leased some of the spaces it was marketing to takers at the time, suggesting that its vacancy rate was, in fact, lower.
New York, nonetheless, was awash in red ink, losses that began to drag the whole company down. General managers of profitable regions — including San Francisco and London, which both hit 2019 revenue targets — found their operations drained of cash as profits were rerouted to make up for the company’s money-losing New York business, former executives told Insider.
Questionable spending further depleted Knotel’s coffers
One practice that raised eyebrows among some former executives was Knotel’s treatment of the security deposits it collected from clients.
In traditional leasing deals, those funds are kept in an escrow account and either returned to a tenant at the end of a lease or absorbed in place of rent. Instead, Knotel used the deposit payments to fund operations, several people familiar with its financials said.
By the end of 2019, Sarva directed employees to stop paying some vendors and counterparties, people who were involved in bill negotiations said. In January 2020, the company had $54 million in outstanding bills, an amount that would balloon to $120 million by October, Insider previously reported.
Concerned that its aggressive leasing in New York was creating a glut of inventory it would not be able to fill with clients, Knotel adopted a business plan in 2019 that required customers to agree to fill a space before Knotel would sign a lease. That pivot created a bottleneck as the company’s real-estate team found itself slowing lease negotiations with landlords as they waited to find tenants to take the space. Deals fell apart and, as with SL Green, bridges were burned with landlords, who began to see Knotel as unreliable.
In August 2019, despite the growing financial turbulence in its business, Sarva and the company said it raised $400 million in a fundraising round that valued Knotel at about $1.3 billion. People with direct knowledge of the fundraising, however, said that $250 million of that money was set aside to buy buildings for Wafra, a lead investor in that funding round. The property acquisition effort never materialized.
Infused with fresh cash, Knotel proceeded to spend lavishly to promote its brand at what proved to be an inopportune moment, just before the pandemic unmoored its business by prompting tenants to cancel leases and abandon spaces in favor of working remotely.
One commercial-leasing broker recalled a February 2020 event, still visible on the company’s website, that took place a month before President Donald Trump declared a national state of emergency over the COVID-19 crisis.
In a Knotel space near Union Square, in Manhattan, brokers were invited to play with golf simulators, as PGA pros stood by to provide lessons on their swings. Guests enjoyed an open bar and hors d’oeuvres. A raffle prize was awarded for a two-night stay and a round of golf at Pebble Beach, the famed course and luxury resort in California. The company also took orders for customized Adidas golf shirts and TaylorMade clubs.
A few days after the event, the commercial broker who attended received a Knotel-branded golf shirt with his name on the back.
Repeated promises of profitability masked financial struggles
Amid the pandemic, 2020 was a disastrous year for the flexible workspace industry as office demand plummeted and tenants with the leeway to pull back on leasing commitments abandoned spaces.
Sarva repeatedly insisted that profitability was around the corner, yet the events that unfolded over the course of the year told a different story.
Knotel laid off or furloughed half its staff in March, received millions of dollars in forgivable loans from the Paycheck Protection Program, and continued collecting rent from tenants even as it stopped paying its own landlords.
Despite the headwinds, Sarva claimed over the summer that Knotel would be profitable by the end of 2020 and that he would raise $100 million to carry the company through the upheaval. The funding never came in and in late October, the company cut another 20 employees. Sarva spun the bad news, telling employees that Knotel could be profitable by the end of the first quarter of 2021.
Dozens of landlords and other creditors and business partners across the US, meanwhile, filed lawsuits against Knotel, saying it had stopped paying rent and other debts. In January 2021 alone, at least eight Manhattan landlords sued Knotel on claims of unpaid rent at several of its locations.
Sarva plotted to reduce Knotel’s real-estate exposure in hopes of salvaging the company. In a slide from a November 2020 presentation viewed by Insider, Knotel said it would seek to cut its global portfolio of 4.8 million square feet of space by 60% and shed more than 80% of the 3.4 million square feet it leases in the US and Canada.
Knotel needed to act fast. At the end of October, its financial liabilities were $161 million more than its total assets, Insider previously reported.
The moves Knotel took mirrored WeWork, which also laid off employees and cut back its footprint under the leadership of its new CEO, Sandeep Mathrani. WeWork’s effort may be paying off, with a report that the company is considering merging with a SPAC to go public in an estimated $10 billion deal, a marked increase from its $2.9 billion valuation last year.
Privately, Knotel was evaluating bleaker options. The company considered liquidation in December, a Knotel lawyer revealed in a bankruptcy proceeding this week.
To buy the firm time, Sarva tried to refinance its corporate debt with an unidentified party, three people with knowledge of that effort said. That group pulled out, however, and publicly traded real estate firm Newmark, one of Knotel’s own investors, bought about $70 million of Knotel’s corporate debt, according to bankruptcy filings, and pushed Knotel to declare chapter 11, the sources said.
See more: Knotel’s cofounder and chairman steps down days after bankruptcy with plans to return
In a public statement to announce its bankruptcy on Sunday, Knotel suggested it would attempt to sell its business to Newmark and downsize its US portfolio through a reorganization.
The company has not disclosed how many of its members may be pushed out by the restructuring and whether any of its members will be reimbursed with their security deposits — the ones that Knotel spent.
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